Many 1031 Exchangers are unaware that the 1031 exchange industry is almost totally unregulated. For this reason you need to be aware of two very important pitfalls to avoid as you consider an exchange.
Pitfall #1: Protect Your Exchange Proceeds
Make absolutely sure that your exchange proceeds will be safe. The funds from your relinquished property sale will be held by your Qualified Intermediary, and you need to verify that those funds are properly secured and protected.
Pitfall #2: Plan Your Property Identification
Ensure that you can identify new property within your statutory 45-day identification period. This deadline is absolute and cannot be extended for any reason. Planning ahead is essential.
In addition, remember that the logistics and mechanics of the exchange are critical as well.
Work With Experienced Professionals
It is important that any exchange be carefully planned with the help of an experienced, competent and creative legal and exchange professional. Preferably one who is completely familiar with the tax code in general, not just Section 1031, and who has extensive experience in doing many different kinds of exchanges.
Thorough planning can help avoid many subtle exchanging pitfalls and also ensure that the Exchanger will accomplish the goals which the transaction is intended to facilitate.
After Your Planning Is Complete
Once the planning is complete, the exchange structure and timing are decided, and the Relinquished Property is sold and the transaction is closed, the facilitator becomes the repository for the proceeds of the sale. The money is kept in the Exchanger’s Trust Account until the Replacement Property is located and instructions are received to fund the Replacement Property purchase.
The funds are then wired or sent to the closing entity in the most appropriate and expeditious manner, and the Replacement Property is purchased and deeded directly to the Exchanger.
All the necessary documentation to clearly memorialize the transaction as an exchange is provided by the facilitator, such as exchange agreement, assignment agreement and appropriate closing instructions.
To ensure compliance with requirements imposed by the IRS, we inform you that the information posted at this website does not contain anything that is intended as legal or tax advice. We recommend that anyone contemplating an exchange seek the advice of an accountant and/or attorney.